Take for example security tokens. Security tokens may be issued as native tokens. Native tokens are dematerialized securities issued directly on the blockchain rendered possible by a recent legislative evolution, i.e. the law of 22 January 2021 or the so-called ‘second Blockchain law’.
Security tokens which are native tokens may fall under the definition of financial instruments, thus triggering the application of the existing legal, tax and regulatory framework applicable to financial instruments.
On the other hand, security tokens which are not native tokens may fall under the definition of virtual assets. What does this change? The applicable regime, and therefore the requirements relating to the issuance, marketing, distribution, selling, etc., will be different. For example, businesses which offer services to their clients relating to the virtual assets (exchange platforms, custody, transfer, etc.) will fall within the regime applicable to virtual asset service providers.
Another hot topic in Luxembourg are NFTs. NFTs do not in principle fall within the definition of virtual assets or financial instruments. Service providers carrying out their activities in relation to NFTs should therefore not be subject to the aforementioned rules. However, this may be the case if the characteristics of the NFTs are such that they would effectively qualify as a financial asset.
All in all, when dealing with digital assets, an analysis of the characteristics of such assets should be prioritised since the qualification thereof will trigger the application of different legal regimes.
When dealing with digital assets, an analysis of the characteristics of such assets should be prioritised since the qualification thereof will trigger the application of different legal regimes.
Regarding the tax framework, it is generally complex to determine the tax treatment applicable to digital assets due to the limited guidance provided so far by the Luxembourg tax authorities. Currently, there is only a circular on direct tax matters issued in 2018 (the ‘Circular’) which clarifies that virtual currencies (including Bitcoin) should be treated as intangible assets for Luxembourg tax purposes without indication of whether it applies to all types of digital assets.
The tax treatment applicable to taxable events related to digital assets mainly depends on the nature of the transaction and the tax status of the taxpayer. For instance, the exchange of virtual assets against other assets or services should be considered as a sale. If the exchange is carried out by an individual, it is key to assess whether the activity performed should qualify as a commercial activity or as the management of the individual’s private wealth. Depending on the qualification retained, income generated from such exchange can be taxed either as business profits, or as miscellaneous income, respectively. On the other hand, when the said exchange is carried out by a corporate taxpayer, income generated should be taxed as commercial income given that corporate entities are considered to undertake a business activity per se.
In the context of a digital asset taxation assessment, general Luxembourg tax rules would apply with the economic reality of the transaction prevailing. Accordingly, reviewing the accounting treatment of the digital asset and any underlying asset should provide a good base to unveil all the relevant tax effects of such transaction.
In terms of tax transparency, digital assets are not yet covered by rules related to exchange of information between tax authorities. However, Luxembourg is expected to swiftly adopt European Union measures related to the exchange of information on crypto assets in the coming months, fostering more transparency and closing loopholes for tax avoidance.
In terms of tax transparency, digital assets are not yet covered by rules related to exchange of information between tax authorities.
Overall, Luxembourg is indisputably a leading European hub for virtual assets. Certain efforts have been made to provide certain degree of clarity and stability on the relevant rules applicable to this rapidly evolving space. However, Luxembourg will definitely need to continue to adapt by offering an attractive regulatory and tax framework.
This article was edited and coordinated by Mélanie Poirrier and Vicente Chapa and contains the views of the whole CMS Digital Assets team comprised of Frédéric Feyten, Aurélien Hollard, Aurélia Viémont, Alejandro Domínguez, Vicente Chapa, Sarah Hantscher, José Ocaña Castilla, Mélanie Poirrier, Arnaud Marquet, Pierre George and Julie Pelcé.